1 Perspectives de politique économique N 21 MAY 2012 Understand, measure & promote service innovation in Luxembourg
2 Understand, measure & promote service innovation in Luxembourg
3 The Perspectives de Politique Économique series includes reports, studies, research results or summaries of conferences commanded by or carried out by employees of the Ministry of Economy and Foreign Trade or by experts of associated institutions. The opinions expressed in these publications are those of the authors and do not necessarily correspond with those of the Ministry of Economy and Foreign Trade. For any request or suggestion, please contact the Observatoire de la Compétitivité of the Ministry of Economy and Foreign Trade of the Grand Duchy of Luxembourg. Ministry of the Economy and Foreign Trade Observatoire de la Compétitivité 19-21, Boulevard Royal L-2449 Luxembourg Phone (+352) Fax (+352) May 2012 ISBN This publication can be downloaded from Ministry of the Economy and Foreign Trade, Luxembourg, 2012
4 Understand, measure & promote service innovation in Luxembourg Report on the seminar Understand, measure & promote service innovation in Luxembourg October 5th, 2011 Author: Sylvain Cottong, strategybuilders.eu
5 1 Introduction The seminar Understand, measure & promote service innovation in Luxembourg took place on October 5 th 2011, at the Public Research Center Henry Tudor in Luxembourg following an initiative of Dr. Serge Allegrezza, director of National Institute for Statistics and Economic Studies (STATEC), director of the Directorate General on Competiveness of the Ministry of Economics & Foreign Trade and director of the Observatory on Competiveness. It was organized under the patronage of the Minister of Economics & Foreign Trade, Jeannot Krecké, with support of the National Agency for the Promotion of Innovation and Research, Luxinnovation, the Observatory on Competiveness, and the National Institute for Statistics and Economic Studies (STATEC). The aim of the seminar was to investigate the particularity of service innovation (vs. product innovation for ex.). A deep understanding of service innovation is crucial for the Luxembourg economy as it heavily relies on services in terms of GDP. The seminar brought together academics and experts & public policy makers in service innovation on the one hand, and service professionals and managers on the other hand. The following points have been discussed: How to define innovation / in services? What are the specificities of innovation / in services? What roles for government: incentives and assessments? What role for research and the actors of the national system of innovation?
6 2 The present report summarizes the presentations of the different speakers as well the concluding discussions. It further develops some ideas concerning the reality & the policies of service innovation in Luxembourg, based on the current situation and the insights gained from the seminar and other sources. The outlook is organized around 4 main questions : What are the right measurements & indicators of innovation and especially service innovation, from a macroeconomic and from a microeconomic point of view? Should there be specific public aid schemes for service innovation and what should be the criteria used for selecting projects? What can be done to further promote service innovation? What are the lessons learned specifically for Luxembourg?
7 3 Contents Introduction... 1 Contents... 3 Part 1: Summary of the seminar s presentations 7 Introduction by Mr. Jeannot Krecké, Minister of Economic Affairs and Foreign Trade INNOVATION & PERFORMANCE GAP IN SERVICES: Presentation by Professor Faridah Djellal from the university of Lille General observations Concerns & myths Service specificities Hope The nature of service innovation Product innovation (technological) Process innovation (technological) Organizational innovations Marketing innovations The definition of R&D is not adapted to services The determinants of innovation in services ( megatrends ) The processes and modes of organizations of innovation Public policy in Service innovation Some concluding thoughts & recommendations: LESSONS LEARNED FROM INNOVATION SURVEYS IN THE SERVICE INDUSTRY: Presentation by Professor Pierre Mohnen from the school of Business and Economics of Maastricht University Innovation indicators Comparing innovation in services and innovation in manufacturing 19
8 4 3. INNOVATION IN SERVICE SYSTEMS: COMPLEX IT ENABLED SERVICE SYSTEMS IN THE CONTEXT OF NETWORKED ENTERPRISES: Professor Dr. Eric Dubois, visiting professor at the universities of Namur and Luxembourg and head of Service Science & Innovation department at the CRP Henry Tudor Introduction What is a service system? The service system life cyle Conclusion SERVICE INNOVATION PROGRAM SERVE AT THE FINNISH TECHNOLOGY AND INNOVATION FOUNDATION: Presentation by Heli Paavola, D.Sc. (Econ) coordinator of Serve and Innovation Foundation and manager at Ramboll Management Consulting Serve s strategic objectives Serve s actions Dimensions of service innovation Funding alone is not enough How service innovation projects are evaluated at Tekes The more specific model & criteria applied to Service Innovation project by Tekes The criteria in the form of questions asked to project owners CONTRIBUTORS TO THE GROWTH OF THE UK S KNOWLEDGE INTENSIVE SERVICE INDUSTRY & OUTLINE OF A POSSIBLE EU STRATEGY: Presentation by Allan Mayo, UK s Department for Business Services Policy Unit & actively engaged also in European Policy Networks Some macroeconomic evidence on services in the UK Difference between Europe & the US Areas of transformative services UK Policy priorities for service innovation 33 6 FUNDING OPPORTUNITIES AT THE NATIONAL RESEARCH FUND (Luxembourg) IN SERVICE INNOVATION RESEARCH PROJECTS: Presentation by Mrs. Andreea Monnat, Phd in Computer Science and Program Manager at FNR (Fonds National de Recherche Luxembourg) Objectives of the FNR CORE program... 34
9 5 6.2 Innovation in services in particular The 4 subdomains in more detail Eligibility criteria for applicants Selection criteria for projects Benefits, motivations & challenges in Private-Public-Partnerships 37 7 PUBLIC AID SCHEMES FOR LUXEMBOURGISH COMPANIES BY THE MINISTRY OF ECONOMICS AND FOREIGN TRADE: Presentation by Mr. Marc Ferring, currently in charge of the National financing and aid to startups at Luxinnovation, the national agency for innovation, research promotion in Luxembourg Aid schemes applicable in service innovation in more detail SERVICE INNOVATION STATISTICS & PRODUCTIVITY IN SERVICES: Presentation by Dr. Serge Allegrezza, initiator of the seminar & director of the National Institute for Statistics and Economic Studies (STATEC), director of the Directorate General on Competiveness of the Ministry of Economics & Foreign Trade and director of the Observatory on Competiveness Presentation of 3 cases studies in service innovation by Luxembourg based companies Lindlab SA: The evolution of the software enabled sales process support over more than 20 years JILBEE: The evolution of the e-learning content generation process for customer s of JILBEE s e-learning online platform Mobey: Building a mobile payment system with an innovative business model Part 2: Conclusions & lessons for service innovation in Luxembourg What is innovation? Complexity of innovation Characteristics of services Service-dominant logic Megatrends in service innovation Measuring innovation in services Innovation policies and selection criteria Confronting the criteria... 64
10 6 Professor Djellal: Professor Mohnen (example of the type of questions asked in a Canadian study in the construction sector): Professor Dubois outlined 4 innovation criteria in service innovation: 64 Criteria used by Tekes in Finland: Alan Mayo on the UK Policy priorities for service innovation: 67 Criteria at FNR for service innovation funding 68 Luxinnovation/Ministry of Economics Preliminary conclusions How to promote service innovation? What can be the lessons learned for Luxembourg? 78 Conclusions... 84
11 7 Part 1: Summary of the seminar s presentations
12 8 Introduction by Mr. Jeannot Krecké, Minister of Economic Affairs and Foreign Trade In his opening talk, Minister Krecké pointed to some global facts about the service industry and about innovation, in relation to Luxembourg: We witness a breathtaking speed of technological development especially in the field of digital transformation and ICT. More & more services, including social services are driven by ICT In the light of the financial turmoil of recent years, still going on, we have to ask ourselves where the economic system will head us to. Do we need a tax on financial transactions? The BRICS countries, as well as other developing countries in the Middle East for example, are multiplying their R&D and innovation efforts and expenditures, whereas years ago they were still underdeveloped countries. Thus, the world wide landscape in innovation & R&D has completely changed, and these countries can surpass our western economies in these areas soon. In Luxembourg, 76% of GDP comes from services, and they count for 2/3 of our national economic growth. Financial services are very important for the Luxembourg economy. Financial intermediation services present an enormous potential for innovation. But innovation in services must also include after sales service in the manufacturing industry for example, and also other types of business services as well as non-technological innovation in marketing & organization. Research that leads to service innovation not only concerns technology, but also for ex. gaining better customer insight to better understand their needs (ethnographic research & social sciences) As far as the Luxembourg State aid for research, development and innovation is concerned (based on the law of 5 June 2009 relating to the promotion of research, development and innovation) there has been an increase of 145 % in 2010 of demands submitted by companies. A total of 76 demands have been submitted in 2010, but only 2 of them concerned
13 9 service innovation. More efforts have to be done to incite service innovation projects in Luxembourg, with regard to the importance of the service sector for the Luxembourg economy. In the Luxembourg context, there is a link between service innovation and intellectual property rights (and the specific law in this area). More generally, public policy makers and economists face the problem of accurately measuring innovation. Progress has to be done here, as you can t manage what you can t measure.
14 10 1. INNOVATION & PERFORMANCE GAP IN SERVICES: Presentation by Professor Faridah Djellal from the university of Lille Professor Djellal leads research programs on innovation & performance in services, on service geography and on employment in services within the Centre Lillois d Etudes Economiques et Sociologiques Professor Djellal s presentation dealt with the innovation & performance gap in contemporary service economies, which presents considerable challenges for public policies. The research she conducted on the innovation-performance relationship outlines a double gap in relation to innovation & performance: The innovation gap concerns the difference between the real nature of innovation in a specific economy and what the traditional economic indicators for innovation (R&D activities, patents) capture. The performance gap measures the difference between actual performance and performance measured by traditional economics tools, mainly productivity & growth. The gaps correspond to hidden performance that are invisible to these tools. Both of these gaps are at the origin of certain paradoxes, which must lead to us to question the validity of some public policies in innovation support schemes. 1.1 General observations Today s economies are innovation & knowledge economies But also service economies However, innovation in services is often unrecognized and underestimated The traditional hypothesis: Innovation is a manufacturing business However, innovation in services does exist and is quantitatively important and strategically fundamental but invisible to the traditional indicators of innovation (R&D and patents) All major economies are tertiary economies for some decades already (from agricultural economies to manufacturing economies to the current service economies)
15 Concerns & myths There is a lot of suspicion formulated towards services in theoretical literature: Book titles: Manufacturing matters Too few producers Expressions: Cost disease Pathological services Peripheral services Dominated, subordinates services Third sector (sounds like Third world) Solow paradox Quotes from influent policy makers: Nicolas Sarkozy: «We need a strong French manufacturing industry ( ). France cannot be only an economy of banks, insurances and services». (France Info, 16 April 2004). Dominique Strauss-Kahn: «Our efforts must be focused primarily on production and particularly on industrial production, on the creation of real jobs, jobs that are directly productive...». (Le Monde, 1998). 6 myths concerning services: Myth 1: Services are unproductive Myth 2: Services are not capital-intensive Myth 3: Productivity in services is low Myth 4: The service society is a servant society ( bad job society) Myth 5: Services are not very tradable Myth 6: Services are not very innovative Professor Djellal then outlined some evidence that disproves these myths. 1.3 Service specificities Services characteristics: Intangibility Interactivity
16 12 Non stockability Heterogeneity Service specificities Product is a fuzzy process Service is interactive Absence of property rights Service sector is heterogeneous Analytical consequences on innovation : nature and organisation - Difficulty to distinguish between product, process and organisation innovation - Enumerating innovations is difficult - Difficulty to assess innovation economic effects - Difficulty to assess the degree of novelty - Easy imitation - Intangible product or process innovation - Formalisation innovation - Importance of certain forms of innovation (tailormade, ad hoc) - Not compatible with a linear concept of innovation - Consistent with an interactive model of innovation - Client participation to the innovation process - Price fixing problems - Appropriation regimes problems - Appropriation regimes problems - Product (innovation) forms are variable - Double accounting problems in KIBS 1.4 Hope Some more recent research puts a different light on services, trying to capture today s microeconomic reality more accurately: Convergence: Industrialization vs. servitization Everything is service: Goods are only a means of masking service provision Rise of service around the product : Servitze your product Manufacturing firms have turned into service firms (IBM, Benetton) From selling goods to hiring goods (Rank Xerox photocopiers) From manufacturing goods to remanufacturing or refurbishing goods (Caterpillar) From goods manufacturers to solutions, functions, experience providers 1.5 The nature of service innovation There are 4 different approaches of innovation in services: Assimilation: innovation in goods = innovation in services = introduction of technical systems
17 13 Differentiation: focus on specificities Inversion: active role of KIBS in other sectors innovations Integration: similar analysis for both manufacturing and services from which the integrative approach seems to be closest to the current reality. The current classification of innovation activities used by most of public policy makers for comparability purposes is defined in the OCDE Oslo manual (2005) : Product innovation (technological) Introduction of a good or a service that is new or significantly improved with respect to its characteristics or intended uses. Process innovation (technological) Implementation of a new or significantly improved production or delivery method Organizational innovations New or significantly improved knowledge management systems to better use or exchange information, knowledge and skills within your enterprise A major change to the organization of work within your enterprise, such as changes in the management structure or integrating different departments or activities New or significant changes in your relations with other firms or public institutions, such as through alliances, partnerships, outsourcing or subcontracting Marketing innovations Significant changes to the design or packaging of a good or service (Excluding routine/seasonal changes such as clothing fashions) New or significantly changed sales or distribution methods, such as internet sales, franchising, direct sales or distribution licenses
18 14 The OSLO manual is a good step into the right direction, but some progress is still needed do deal a.o. with the following: Non-technological product innovation (for ex a new insurance contract or a new financial product, a new field of expertise in consultancy) Non-technological process innovation (methodologies, protocols) Ad hoc and tailor-made innovation Social innovation Innovation in public services Innovation in complex packages (business models): new formulas or new concepts (for ex in trade and hostelry). Today, all sectors of the economy innovate by introducing new services and the % of firms introducing non-technological innovation (organizational & marketing) keeps on growing. The definition of R&D is not adapted to services Frascati Manual: technicist and scientist bias. R&D in services is composite: mixing Science & Technology, Humanities & Social Sciences, organizational engineering, etc. Humanities & Social Sciences not sufficiently taken into account; organizational engineering not considered at all. 1.6 The determinants of innovation in services ( megatrends ) Industrialization of services Customization Technology IT-literacy Globalization Demography (and particularly ageing) Deregulation
19 The processes and modes of organizations of innovation 2 different approaches: Applying the traditional industrial & linear planning and execution model to services Applying open innovation models (rapidly gaining importance) Chain linked or interactive model (Kline and Rosenberg) Several non-programmed or emergent models o Bricolage innovation model o Practice-based model o Ad hoc innovation o Rapid application Public-Private Innovation Networks (PPINs) Consultant-aided innovation model Consumer/user/demand-driven innovation Illustration: Sources of information used by innovative firms in the service sector, , as a % of total innovative firms Services Within enterprise From other enterprises within From suppliers From clients From competitors From universities From government Conferences, journals Fair, exhibitions Services
20 16 Note: Iceland and Sweden are excluded due to limitations on the quality of the data. Source: OECD, based on data from Eurostat, CIS3 Survey, Public policy in Service innovation Current public policies tend be still dominated by a manufacturing and a Science & Technology bias by focusing on public research and industrial sectors, in particular high technology. promoting technological innovation (based on scientific and technical R&D and patents appropriation). favoring scientific and technological training. 1.9 Some concluding thoughts & recommendations: In services 3 types of innovation policies can be implemented: Specific policy for services (Demarcation) Generalization of industrial policies to services (Assimilation) New policies grasping both (Integration). There is a need for alternative innovation public policies (Demarcation or Integration) : Promote invisible innovations Emphasize on innovation and R&D policies specific to services, ie, favor non-technological innovation and R&D Support services innovations within manufacturing and agriculture Support specific skills needed for non-technological innovation All services are concerned, but an emphasis could be put on: KIBS, Proximity services & public services.
21 17 2. LESSONS LEARNED FROM INNOVATION SURVEYS IN THE SERVICE INDUSTRY: Presentation by Professor Pierre Mohnen from the school of Business and Economics of Maastricht University Professor Mohnen s research focuses on applied econometrics in the areas of production, productivity, innovation, innovation policy and development. His presentation outlined lessons learned from innovation surveys in the service industry. The question addressed was Should we treat the service industry providers differently from the manufacturing industry? To this purpose, some econometric studies dedicated to the service industry have been analyzed concerning the determinants of innovation, their obstacles and their complementarity, innovation modes and their complementarity, the use of intellectual property rights as well as the impact of innovation on productivity. Professor Mohnen started by outlining that with market and non-market services counted together, the service sector represents 85,2 of GDP in Luxembourg. 2.1 Innovation indicators R&D and innovation expenses are considered as inputs whereas patents, publications, trademarks, new products, new processes, organizational innovation and marketing innovation are considered as the measure of output. The definition of R&D adopted stems from the Frascati manual: Research and development comprises creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of knowledge to devise new applications. This definition for example excludes sales promotion & market research activities. The costs of innovation come from R&D, acquisition of disembodied technologies, embodied technologies and other preparations for production.
22 18 Trademarks are an important signal for non-technology based innovation like marketing innovation and process innovation. The Oslo manual delivers the definition of innovation output: A product innovation is the introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics. A process innovation is the implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software. A marketing innovation is the implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing. An organisational innovation is the implementation of a new organisational method in the firm s business practices, workplace organisation or external relations. Professor Mohnen then presented several survey results concerning The share of services in business R&D Patent activity by sector Service related trademarks Innovation intensity per sectors He then drew the following first conclusions from these figures: The conventional innovation indicators can be applied to services Services account for a large and rising share of innovation Some service sectors are more innovative than manufacturing sectors There are additive effects between different innovation modes (process innovation & marketing innovation for ex.)
23 Comparing innovation in services and innovation in manufacturing What are the determinants of innovation? What are the effects of innovation on productivity? Are there complementarities in innovation modes? Different surveys have been presented to try to find answers to these questions. Professor Mohnen outlined the econometric methods that were used in these surveys. In summary, the results are: R&D (as defined in the Frascati manuel) has only an effect on product innovation in manufacturing and no effect in service innovation (Thus, R&D, as defined by the Frascati manual, is not an indicator for service innovation) ICT is an important enabler for innovation, both in the service and in the manufacturing sector, whereas broadband connectivity tends to have a higher effect on service innovation than on manufacturing innovation. Productivity: Organizational innovation has the strongest effect on productivity. Product and process innovation only lead to productivity gains when combined with organizational innovation. Innovation has a higher effect on the service industry s productivity than the manufacturing sector s productivity. These results show the importance of taking into account non-technological innovation. Product & process innovation are complementary Process & organizational innovation are also complementary Product and organizational innovation are substitutes These results are consistent for manufacturing and for services Prof. Mohnen continued presenting the results of a survey on determinants of innovation in Croation SMEs, as survey that he was co-authoring: Comparison of service and manufacturing sector. The model was based on 5 innovation decisions: R&D, new products, new processes, organizational innovation & marketing innovation.
24 20 The conclusions here are: There are differences between the manufacturing and the service sector in innovation determinants There are some similarities in the complementarities of innovation modes Prof. Mohnen also concluded that there is no need for a different type of surveys for service industries, unless they focus on a specific industries and sectors. He finished his presentation by presenting a questionnaire from a Canadian survey in the construction industry. Type of questions asked: Business environment and success factors Strategies within business (business practices ass well as commercial strategies) Human resources within business Technology within business (advanced technologies used) This survey put much more focus on the soft factors that are supposed to largely influence innovation but that are not well represented in the Oslo Manual on innovation definition and the Frascati definition on R&D. This also raised the questions of how to capture the value chains of companies that operate in different industries and on the minimum size a company must have to be able to measure innovation.
25 21 3. INNOVATION IN SERVICE SYSTEMS: COMPLEX IT ENABLED SERVICE SYSTEMS IN THE CONTEXT OF NETWORKED ENTERPRISES: Professor Dr. Eric Dubois, visiting professor at the universities of Namur and Luxembourg and head of Service Science & Innovation department at the CRP Henry Tudor Professor Dubois presentation investigated innovation in service systems & complex IT enabled services developed in the context of networked enterprises, with specific focus on service system engineering and service system design, as these activities offer a high potential level of innovation in terms of customer centricity and organizational agility. 3.1 Introduction Service systems are specific types of services, IT enabled and presenting more complexity The complexity of Service Systems offers distinct opportunities for innovation, at the product/service level and at organisational level Adequate instruments and measures have to be designed and used for managing and controlling these innovations 3.2 What is a service system? A service (vs a product) is characterised by a.o: intangibility, co-production/interactivity, simultaneity, heterogeneity, perishability, transferability, cultural specificity and information-intensity. One of the properties is customer centricity, made up by service quality and service experience. A service system is a a configuration of people, processes, technology and shared information connected through a value proposition
26 22 a dynamic co-creation of value trough the participation in the exchanges with customers and external/internal service systems An example of a service eco-system are intelligent transport service systems, characterized by the value proposition, technology, information & knowledge, people & skills, processes and partnerships. Due to the complexity of massively technology based service systems, customer centricity (usability) of these services presents a real challenge. 3.3 The service system life cyle Service Design and Service engineering are the new determinants of innovative services whereas service value, service marketing and service operation are the traditionally known elements of service systems.
27 23 The service system lifecycle should work as a loop, capturing feedback from users in service operation to readjust service value and service design, to continuously improve the service experience (living labs, open innovation). Prof. Dubois then outlined 4 innovation criterions in service systems: Innovation criterion #1: Identify the qualities and measures, which demonstrate the uniqueness of the proposed service system (service quality & service experience) Innovation criterion #2: What are the mechanisms envisaged for a continuous sustainable customer centric service evolution (open innovation, co-creation, living labs) Innovation criterion #3: Demonstrate the alignment of resources (people, processes, information, technologies and partnerships) with the service qualities and associated measures. Enterprise architectures (the IT infrastructure supporting and reflecting a service business model) are crucial for effective service systems. Innovation criterion #4: Governance of innovation through enterprise architecture based portfolio and project management. 3.4 Conclusion Development of TISP, a template based on a questionnaire for describing a service system innovation idea: